New Threats To The AUM-Fee Model

As part of a new joint venture between Advisor Perspectives and Dan Solin, we are offering a series of group-coaching webinars to help advisors convert more prospects into clients and grow their assets under management. For more information, go here.

My article last month on developments that imperil the AUM-fee model generated a spirited response. A recent report from Accenture Consulting and an interview I did with a compliance professional illustrate why this subject is more controversial than I originally thought.

AUM-Fee Model

The Accenture report

Top value fund managers are ready for the small cap bear market to be done

During the bull market, small caps haven't been performing well, but some believe that could be about to change. Breach Inlet Founder and Portfolio Manager Chris Colvin and Gradient Investments President Michael Binger both expect small caps to take off. Q1 2020 hedge fund letters, conferences and more However, not everyone is convinced. BTIG strategist Read More

The accounting and consulting firm Accenture surveyed over 4,000 consumers in the U.S. and Canada. It was part of a “multi-year research initiative tracking consumer banking attitudes and behaviors.” While the focus was on attitudes towards banks, some of the findings have ramifications for investment advisors as well.

The survey found that loyalty to existing providers is fragile. In the past year, 11% of consumers switched banks. The rate of switching to a virtual bank “is at double-digit levels,” according to Accenture.

Most striking is the finding that 46% of consumers would be willing to use robo-advice in the future.

The survey noted the substantial savings offered by robo-advice in the wealth management industry and referenced studies showing the “automated investment advice market” will reach $500 billion in assets by 2020.

Most troubling for investment advisors was the response to this question: “In the future, how willing would you be to receive the following types of advice and services in a way that was entirely computer-generated, without any input from a human advisor?”

Willingness to receive advice about investments (asset allocation for wealth management) received an affirmative response from 79% of those surveyed in North America, including 80% of millennials and 83% of “mass affluents.” The percentages were only slightly lower when the question focused on advice about planning finances for retirement.

New entrants

As I noted in my previous article, the entry of Vanguard and Schwab into the robo advisory space adds more pressure on the AUM-fee model. Both of these behemoths offer a combination of cutting-edge technology and access to a credentialed human advisor, at a fraction of the cost of traditional advisors.

While it’s unlikely either will be able to match the quality of service or the depth of personal relationships of traditional advisors, this troublesome question remains: Is the added value you are offering worth a multiple of the fees charged by these powerful new entrants?

Conflicts

I previously noted a legal issue with the AUM-model that appears to have been largely ignored. When an advisor bases fees on AUM and provides financial-planning advice, there’s a potential for conflict of interest. This conflict is self-evident. Providing advice that diminishes AUM (like paying off a mortgage) reduces fees to the advisor.

In making this observation, I was not suggesting that advisors are resolving this conflict in their favor. I was simply observing that it’s a conflict that needs to be disclosed.

I interviewed Daniel Bernstein, chief compliance counsel for MarketCounsel. MarketCounsel describes itself on its web page as “…the leading business and regulatory compliance consulting firm to the country’s preeminent entrepreneurial investment advisors.”

In Bernstein’s view, there is a clear conflict of interest in the situation I described. He objected to my characterization of it as a “potential conflict of interest,” noting there is no such thing. He regards it as an actual conflict that must be disclosed. He advises his clients to make this disclosure.

The Advisory Profession’s Best Web Sites by Bob Veres
His firm has created more than 2,000 websites for financial advisors. Bart Wisniowski, founder and CEO of Advisor Websites, has the best seat in the house to watch the rapidly evolving state-of-the-art in website design and feature sets in this age of social media, video blogs and smartphones. In a recent interview, Wisniowski not only talked about the latest developments and trends that he’s seeing; he also identified some of the advisory profession’s most interesting and creative websites.

FOLLOW VALUEWALK ON

ABOUT VALUEWALK

ValueWalk.com is a highly regarded, non-partisan site – the website provides unique coverage on hedge funds, large asset managers, and value investing. ValueWalk also contains archives of famous investors, and features many investor resource pages.

The Life and Career of Charlie Munger

You can learn from Charlie Munger firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

Learn from the best and forever change your investing perspective

One incredible tidbit of knowledge after another in the page-turning masterpiece of a book

Discover the secrets to Charlie’s success and how to apply it to your investing